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Will the real economy please stand up?

Jun 01, 2002

DURING the past few years, we have seen a great economy and the antithesis of a great economy. Will either be the norm in the future?

Economist Lawrence Chimerine told TTMA members that the miserable economy the past 18 months has been an aberration for several reasons and that America has an economic future that will more closely resemble the past decade than the past year.

“The 1990s were not an economic fluke,” said Chimerine, president of Radnor International Consulting. “The prosperity we experienced during the 1990s reflects fundamental changes that we made.”

Chimerine blamed several factors — all temporary — for the current economic malaise, and he credited these factors for strengthening the U S economy:

Increased competition

This comes from domestic and international sources. Deregulation, which eliminated substantial governmental controls and turned many industries over to basic market forces, forced companies to provide customers with the best overall value. Foreign competitors have achieved the same results, while helping to keep inflation in check, Chimerine said.

Growth of technology

Technology has helped provide the means to remain competitive. By using computers and other technological advancements, companies have been able to cut costs while improving productivity and quality.

Discount chains

The growth of major discount chains has shifted the power in those industries from the sellers to the buyers. “These large buyers fundamentally tell you what they are going to pay you for your product,” Chimerine said.

Oversupply of retail space

Chimerine said this retail industry is extraordinarily competitive, making price increases very rare.

Oversupply of manufacturing capacity

Most industries have too much manufacturing capacity, Chimerine said.

“All of these factors have shifted us away from an economy that was prone to inflation which cut short many of the economic expansions,” he said. “This is a long-lasting — probably permanent — change in the United States. Except for prescription drugs and insurance premiums, competition is so intense in most industries that price increases just don't happen anymore.

“The most important effect has been on the decision-making and planning process,” Chimerine said. “Every company in every industry now has to start its planning with the assumption that they will be unable to raise prices.”

Chimerine credited this environment with forcing companies to reduce costs and improve the value they deliver to the customer. This led to an overall investment boom and an explosion in productivity growth. These gains had a positive effect as they worked their way through the entire economy.

On the other hand

The effects of the events that caused the slowdown have worked their way through the economy, Chimerine said. The factors are:

Y2K

The negative predictions in early 1999 began affecting the computer industry by accelerating sales of hardware and software in order to prepare for problems associated with Y2K. This artificial growth in advance of Y2K meant fewer sales once the scare was over. As companies digest this overbought condition, the tech sector should bounce back. “We may not see tech companies grow at 30% annually,” Chimerine said. “They may grow at only 15%-20% per year.”

Dot.com frenzy

Projections that the Internet would solve all of our problems led to overinvestment in telecom equipment. The ensuing tech collapse has been the biggest drag on the economy since spring 2000, Chimerine said.

The energy spike

Rising prices sucked the purchasing power out of the economy because the United State spent $75 billion more in imported oil in 2000-2001.

Monetary policy mistakes

The Federal Reserve policy to raise interest rates in 2000 was wrong, Chimerine said. Wrong, too, was the decision to wait six months to correct the mistake.

September 11

Just as the economy began to rebound, terrorists stopped the recovery in its tracks, Chimerine said.

Back on track

The economist listed multiple reasons to believe that the economy is back on track.

Housing sales are rising, and when someone buys a house, they spend on average 8-9% on top of that to furnish it.

The economy (except for the airline and travel industry) has recovered from the effects of September 11.

Incomes are rising. Salaries are growing faster than the rate of inflation.

Tax cuts. The rebates from last summer and today's lower income tax rates are putting approximately $70 billion more into the hands of consumers.

Increased defense and homeland security spending also sends more dollars through the economy. Because of September 11, the federal government will spend $50 billion more than it otherwise would have.

“All of these factors lead me to conclude that what we have seen in the past two to three months is real, a process of economic growth that is likely to continue over the next several years,” Chimerine said. “But it will not be the greatest boom in history. It may not be as spectacular as the 1990s, but it should lead us back to a prosperous, strong economy. We should see that the last two years were an aberration.”